pecial Report Eyes on the Fed

Bernanke: Fed will make profit on bailout

Fed Chairman says he's confident the Fed will be paid back for loans made; sees moderate economic growth in 2010.

NEW YORK (CNNMoney.com) -- Federal Reserve chairman Ben Bernanke said Monday he's confident the Federal Reserve will make money on the trillions it has pumped into the economy since the start of 2008.

"I think we're in very good shape," Bernanke said, answering questions following a speech at the Economic Club of Washington. "I do believe we're going to get back all the money, and indeed we'll be showing for the taxpayers fairly significant extra income."

Bernanke was referring specifically to Fed programs -- not the Troubled Asset Relief Program (TARP). The U.S. Treasury will likely lose money on TARP, though the Obama administration is expected to announce soon that losses will be $200 billion less than initially expected.

The Fed has actually pumped far more money into the economy than Treasury did through TARP.

Its balance sheet soared to $2.2 trillion currently, from less than $900 billion before the financial crisis began in 2008.

The book on some of that lending is already closed. For example the Fed has stopped extending money for commercial paper, a form of short-term borrowing used by the nation's largest corporations. The Fed had nearly $300 billion in commercial paper on its balance sheet a year ago, but has only about $15 billion today.

The company that was the biggest recipient of help from the Fed was insurer American International Group (AIG, Fortune 500), which at one point in October 2008 owed the central bank nearly $90 billion. While the firm has yet to start paying back that money in cash, the government has taken various assets and units of the company in lieu of payment. The Fed intends to sell those assets in the future when they have a better market value. Today, the Fed has AIG loans of only $20.7 billion.

In his comments, Bernanke did not specify if the Fed will make money on the AIG transaction itself, or if losses there will be covered by other actions by the Fed during the crisis.

Much of the Fed's efforts to pump money into the economy came through the purchase of mortgage securities backed by finance firms Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), as well as the debt issued by those companies. It eventually plans to purchase $1.25 trillion of those mortgages and $175 billion of that debt. It has also purchased about $300 billion in U.S. Treasurys.

Most of Bernanke's speech was focused on the outlook for the U.S. economy, and he repeated his earlier forecasts of moderate growth through next year, dogged by continued high unemployment.

Bernanke said that the U.S. economy continues to face "formidable headwinds" that are likely to result in only a moderate recovery.

He said credit remains tight for consumers and small businesses and that the labor market remains weak, despite an end to the deep job losses earlier this year.

"Household spending is unlikely to grow rapidly when people remain worried about job security and have limited access to credit," he said.

Bernanke repeated earlier assurances that inflation is not a deep concern, despite the trillions of dollars the Fed pumped into the economy.

And he's confident that the changes being made in oversight of banks and Wall Street should prevent another crisis such as the one that hit financial markets a year ago.